UK draft energy reform bill unveiled

Draft legislation to reform the UK's electricity market to ensure secure, clean and affordable energy endeavours to secure the necessary investment for a low-carbon energy mix including new nuclear.

The UK faces the closure of around one-fifth of its generating capacity over the next decade, while energy demands continue to increase. The country's Department of Energy and Climate Change (DECC) estimates that £110 billion ($174 billion) of new investment will need to be attracted to develop the low-carbon generating capacity required to fill the ensuing energy gap while meeting the country's climate change goals. The long-awaited draft energy bill, now published for pre-legislative scrutiny, sets out reforms to help achieve that.

New nuclear, along with renewables and fossil fuels abated by carbon capture and storage (CCS) are recognised in the document as the three families of low-carbon generation with roles to play in the future energy mix. These three families all have much higher upfront capital costs than unabated fossil fuel competitors, such as gas, hindering their development and deployment in the existing electricity market. "We need electricity market reform to reduce the risk and cost of capital for all these low-carbon technologies," the bill notes.

At the heart of the bill are electricity market reform (EMR) measures that promise to support low-carbon generation through feed-in tariffs with contracts for difference (CfD). CfDs are long-term contracts which provide revenue certainty to investors in low-carbon generation such as renewables, nuclear and CCS-equipped plant. Returns for generators are stabilised at a fixed level known as a strike price.

The system of revenue support for low-carbon generation is to be complemented by a capacity market, to ensure the availability of sufficient reliable capacity to meet demand. The capacity market and CfD incentives will be supported by an emissions performance standard, effectively preventing the construction of new coal plants emitting more than 450g of carbon per kilowatt hour, and a carbon price floor, which provides economic incentives to move away from high-carbon technologies by increasing the price paid for emissions. The carbon price floor was announced in 2011.

The draft legislation confirms the role of National Grid as the independent system operator that will administer the two systems of the long-term low carbon incentives (CfDs) and the capacity market. The system operator will itself be regulated by national energy regulator Ofgem. Further details on the respective roles and responsibilities of the government, the system operator and Ofgem will be set out later in the year and in secondary legislation in 2013-14.

Secretary of state for energy and climate change Edward Davey said that an unreformed electricity market would not be in the national interest. "If we don’t secure investment in our energy infrastructure, we could see the lights going out, consumers hit by spiralling energy prices and dangerous climate change. These reforms will ensure we can keep the lights on, bills down and the air clean," he said.

The time is now

Early responses welcomed the draft legislation. Keith Parker, chief executive of the UK Nuclear Industry Association, described the bill as a critically important step towards securing the investment needed to replace the UK's ageing nuclear infrastructure. "Without nuclear we will have an energy gap. Modern nuclear power is an essential part of the mix, alongside renewables and carbon capture and storage, to provide clean, secure and affordable electricity to power our homes, schools, hospitals and industries," he said. "Public support for new nuclear is the highest it has ever been."

Speaking for UK business organisation the CBI, deputy director-general Neil Bentley stressed the urgency for parliamentary action to fill in the details on the UK's future energy market. "With major investors waiting in the wings, these details are needed as soon as possible," he said.

A spokesman for the UK's engineers said the bill effectively "kills off" the idea of a truly open electricity market but was nevertheless necessary to encourage a balanced energy mix of baseload nuclear power alongside intermittent forms of renewable energy backed up by gas-fired generation. "If these reforms are rejected by the power industry because they don't like certain elements, it may be time for the government to consider re-taking control of this essential element of our national infrastructure," said Alastair Smith, chairman of the Institution of Mechanical Engineers' power division. "The UK needs certainty now if we are to avoid jeopardising our security of supply in the relatively near future," he added.

Building up the regulators

As well as the market reforms, the bill aims to improve the UK's regulatory regimes. The bill introduces a strategy and policy statement which would set out the government's strategic priorities for the energy sector and clarify the roles and responsibilities of those bodies involved in or affected by the country's energy policy, including energy regulator Ofgem and the secretary of state.

The bill also contains proposals to consolidate the Office for Nuclear Regulation (ONR), established in 2011, as a statutory body. This, says DECC, will ensure that the ONR is fully able to meet the challenges of the first nuclear new build in the UK since the 1980s.

The energy bill was introduced in draft form to allow pre-legislative scrutiny, which should speed up its passage through parliament. The full bill is expected to pass into law in 2013. However, it provides for some level of governmental assurance through so-called final investment decisions (FIDs) to enable some investment to come forward before the CfD regime is established.